Edited version of private advice

Authorisation Number: 1052195846341

Date of advice: 8 December 2023

Ruling

Subject: Taxable supply - sale of vacant land

Question 1

Is the sale of the property (vacant land) a taxable supply in accordance with section 9-5 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

Question 2

Is the gain made from the sale of the property eligible for the 50% discount under Division 115 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Relevant facts and circumstances

You are registered for goods and services tax (GST).

You are a professional in the healthcare industry and carry on an enterprise in that profession.

You also carry on a leasing enterprise. Your leasing enterprise comprise of three residential properties which are all currently leased.

In MMYYYY, you entered into a Contract for the sale and purchase of land (Purchase Contract) for the purchase of vacant land (the property).

You purchased the property from Entity A for $XX. The Purchase Contract states that the sale is made on the basis that the supply is a taxable supply in full and that the margin scheme is not being used for this sale.

The Purchase Contract stipulated that the purchaser must make a GST residential withholding payment (GSTRW) at completion.

Settlement for the purchase occurred in MMYYYY.

You purchased the property with the intention of building a duplex on it and for the property to be a long-term investment asset to be used for income producing purposes through leasing of both properties in the duplex.

You took out a loan in relation to these property transactions.

You sourced the property through a buyer's agency firm, and you were provided with a brochure which showed that the construction costs of the duplex would be $XX.

Soon after the purchase of the property, you submitted the development application (DA) for the construction of a duplex on the property. The DA was approved around the end of YYYY.

In MMYYYY the buyer's agency notified you of a price increase for the costs of construction of the duplex.

In MMYYYY, the buyer's agency notified you of a further price increase for the construction of the duplex. This was a significant increase from the original estimate of the costs of construction of the duplex.

The project suffered extensive delays for a number of reasons including the fact that the council was behind in terms of development approvals.

You became concerned regarding the project and were worried about further delays to the construction process and potential further price increases.

You were also concerned about the economic conditions for the building industry and given a number of builders had entered into administration, you were concerned this could potentially occur to your project.

Due to the reasons outlined above, you decided not to proceed with the build of the duplex and sell the property as vacant land. There were no financial penalties for not proceeding with the construction of the duplex.

You made the decision to sell the property around MMYYYY at which time the property was advertised for sale.

In MMYYYY, you entered into a Contract for the sale and purchase of land (Sale Contract) for the sale of the property. The sale was settled in MMYYYY.

You incurred expenses in relation to the purchase of the property, the selling agent fee, legal fees, mortgage fees and interest on the loan. You have not claimed any input tax credits on your BASs for these acquisitions.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

Income Tax Assessment Act 1997 Section 995-1

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Division 104

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 115-25

Reasons for decision

Question 1

Is the sale of the property (vacant land) a taxable supply in accordance with section 9-5 of A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Summary

The sale of the property is a supply that is made in the course of furtherance of a leasing enterprise carried on by you.

GST is payable on this sale as all requirements of section 9-5 of the GST Act are satisfied.

Detailed reasoning

You are liable for GST on taxable supplies that you make.

A supply will be a taxable supply where the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) are satisfied. Section 9-5 of the GST Act states:

You make a taxable supply if:

(a) you make the supply for *consideration; and

(b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c) the supply *is connected with Australia; and

(d) you are *registered or *required to be registered.

However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed

(* denotes a defined term under section 195-1 of the GST Act)

The sale of the property will satisfy the requirements of paragraph 9-5(a) of the GST Act as the sale is made for consideration. Additionally, the property is connected with Australia as the property is located in Australia which will satisfy the requirements of paragraph 9-5(c) of the GST Act. Furthermore, you are registered for GST therefore you will satisfy the requirements of paragraph 9-5(d) of the GST Act.

There are no provisions in the GST Act under which the sale of the property would be GST-free.

There are also no provisions in the GST Act allowing the sale of vacant land to be input taxed. This is supported by Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises under paragraph 47:

47. Vacant land is not capable of being occupied as a residence or for residential accommodation as it does not provide shelter and basic living facilities. Vacant land is not residential premises.

Enterprise

The scope of 'enterprise' for GST purposes is wider than the scope of 'business' for income tax purposes. An enterprise can include activities that may not constitute a business but have the character of a business transaction.

Subsection 9-20(1) of the GST Act provides that an enterprise is an activity, or a series of activities, done amongst other things:

(a)  in the form of a business; or

(b)  in the form of an adventure or concern in the nature of trade; or

(c)   on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property;

...

Section 195-1 of the GST Act provides that 'carrying on an enterprise includes doing anything in the course of the commencement or termination of the enterprise'.

You have three residential premises that you are currently leasing and have been leasing for a period of time. You are therefore conducting a leasing enterprise in accordance with paragraph 9-20(1)(c) of the GST Act.

You purchased the property in the course or furtherance of your leasing enterprise as you intended to build a duplex on it and lease it out. The property is therefore an investment/capital asset of your leasing enterprise. The fact that you did not go ahead with the build does not change that it is an asset of your leasing enterprise.

Generally, where you are registered or required to be registered for GST, the disposal of a capital asset in Australia, in the course of carrying on your enterprise, is a taxable supply and you are required to account for GST on that sale. Relevantly, Footnote 104 and 106 of Miscellaneous Taxation Ruling MT 2006/1 states:

[104] Note however that where there is an enterprise registered for GST purposes, the supply of investment assets or non-trading assets in the course or furtherance of an enterprise would still form part of the enterprise activities, see section 9-5 of the GST Act.

...

[106] 97 ATC 5135; (1997) 151 ALR 242; 37 ATR 358. Further to footnote 104, isolated sales of land by an enterprise already registered for GST would be subject to GST.

Therefore, the sale of the property is made in the course or furtherance of the leasing enterprise that you carry on and paragraph 9-5(b) of the GST Act is satisfied. As all the requirements of section 9-5 of the GST Act are satisfied, the sale of the property is a taxable supply and therefore, GST is payable on the sale.

Question 2

Is the gain made from the sale of the property eligible for the 50% discount under Division 115 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

The sale of the property is not part of carrying on a business or an isolated profit making transaction and is eligible for the 50% Capital Gains Tax (CGT) discount.

Detailed reasoning

Section 995-1 of the ITAA 1997 defines 'business' as including any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

You carry on a business in an industry that is unrelated to real estate or property development.

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? provides a guide to the indicators that are relevant to whether or not a person is carrying on a business of primary production. This is not just limited to primary production and can be applied in the case of a property development or leasing business.

Some indicators of carrying on a business

Paragraph 13 of TR 97/11 lists the indicators that the courts have held as relevant:

•         whether the activity has a significant commercial purpose or character

•         whether the taxpayer has more than just an intention to engage in business

•         whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

•         whether there is repetition and regularity of the activity

•         whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business

•         whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit

•         the size, scale and permanency of the activity

•         whether the activity is better described as a hobby, a form of recreation or a sporting activity.

With application to your circumstances, you had no intention of carrying on a business and your planned activity did not have a significant commercial purpose. You did not undertake the activity to make a profit, but to derive an income stream. There was no repetition or regularity with the plan to build accommodation for leasing purposes or buying and selling properties, even though you have multiple properties that are leased.

The activity is not carried on in a similar manner to that of the ordinary trade as properties are purchased approximately every two years and leased out and not organised in a manner in which a business would. Though considerable funds would have been invested in the vacant land and purchase of the three investment properties, the size, scale and permanency of the activity was lacking.

The plan on building residential accommodation on vacant land and current leasing of existing properties is neither a hobby or recreation or done in the course of carrying on a business. You intended to derive and do derive rental income from your other properties, without the characteristics of carrying on a business.

Taxation Ruling TR 92/3 Income tax: whether profits on isolated transactions are income deals with isolated transactions and sets out the Commissioner's view on the application of the principles established in Federal Commissioner of Taxation v The Myer Emporium Ltd (1987) 163 CLR 199 ('Myer'). Paragraph 32 of TR 92/3 states that a profit or gain made in the ordinary course of a business includes:

•         a profit or gain arising from a transaction which is itself a part of the ordinary business of a taxpayer (judged by reference to the transactions in which the taxpayer usually engages); and

•         a profit or gain arising from a transaction which is an ordinary incident of the business activity of the taxpayer, although not a transaction entered into directly in its main business activity.

In determining whether profits or gains made from the disposal of real property are made in the ordinary course of business, one must establish if a taxpayer is carrying on a business and what the nature of the business is.

In relation to property or land development, Taxation Determination TD 92/124: Income Tax: property development: in what circumstances is land treated as 'trading stock'? recognises that repetitive buying and selling of property is not necessary to establish that a business of property acquisition, development and sale is being carried on. If a 'definite and continuous cycle of operations' has been initiated, a business of property development has commenced.

Once it is established that there is a business, it then follows that the profits made in the ordinary course of carrying on that business constitute income. This principle has been discussed in many court cases, generally in the context of distinguishing between income and capital receipts. Californian Copper Syndicate (Limited & Reduced) v. Harris (1904) 5 T.C. 159 ('Californian Copper Syndicate') has been cited with authority in many Australian court cases as the leading case regarding these principles.(See for example, Westfield Limited v Commissioner of Taxation (1991) 28 FCR 333, Myer, London Australia Investment Company Limited v Federal Commissioner of Taxation 77 ATC 4398 ('London Australia'') and CMI Services Pty Ltd v Federal Commissioner of Taxation (1990) 90 ATC 4428).

In Californian Copper Syndicate Lord Justice Clerk stated at 165-166 that:

It is quite a well-settled principle in dealing with questions of assessment to income-tax, that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than that for which he originally acquired it, the enhanced price is not profit...But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable, where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business.

...What is the line which separates the two classes of cases it may be difficult to define, and each case must be considered according to its facts, the question to be determined being, is the sum of the gain that has been made a mere enhancement of value by realising a security, or is it a gain made by an operation of business in carrying out a scheme for profit-making.

In London Australia, Gibbs J, in discussing the above principles, stated:

Their Honours [in Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of Taxation (1945) 73 CLR 604] went on to point out that not all of the proceeds of a business carried on by a taxpayer are income for the purposes of the [Income Tax Assessment] Act; they will be so only if they are income 'in accordance with the ordinary usages and concepts of mankind, except in so far as the Act states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income' (see at p. 615). However it is in my opinion established by this and many other cases in which Californian Copper Syndicate v. Harris has been applied that if the sale in question is a business operation, carried out in the course of the business of profit-making, the profit arising on the sale will be of an income character. To apply this criterion it is necessary 'to make both a wide survey and an exact scrutiny of the taxpayer's activities': Western Goldmines N.L. v. C. of T. (W.A.) (1938) 59 C.L.R. 729 at p. 740.

Gibbs J also noted that the test in Californian Copper Syndicate is applicable to any business.

Similarly, in Myer, the High Court stated that:

Although it is well settled that a profit or gain made in the ordinary course of carrying on a business constitutes income, it does not follow that a profit or gain made in a transaction entered into otherwise than in the ordinary course of carrying on the taxpayer's business is not income. Because a business is carried on with a view to profit, a gain made in the ordinary course of carrying on the business is invested with the profit-making purpose, thereby stamping the profit with the character of income.

Even where the requisite intention may not exist on entering into the transaction, the High Court held in Whitfords Beach Pty Ltd v Federal Commissioner of Taxation (1983) 14 ATR 247 (Whitfords) there be a change of intention.

In Whitfords there was a change of intention at the time a company holding a large parcel of land originally acquired for long-term investment, adopted a new set of articles that changed the intended usage of the land.

In Rosgoe Pty Ltd v Commissioner of Taxation (2015) FCA 1231, Logan J reinforced that the intent at acquisition and later, on sale of the property should be considered separately and the transactions as distinct activities:

When, later, the property was sold, the profit here arose not from the purchase but from the sale and because the sale was not part of the profit-making scheme the profit did not arise 'from the carrying on or carrying out' of that scheme.

The intention and purpose needs to be carefully considered in each and every case. In Westfield v Commissioner of Taxation [1991] FCA 86 ('Westfield'), Hill J said:

What was said in Myer has been applied in a number of cases in this court since. Among them are Moana Sand Pty Limited v Federal Commissioner of Taxation (1988) 88 ATC 4897, and Federal Commissioner of Taxation v Cooling (1990) 22 FCR 42. It does not, however, follow from the judgment in Myer, or for that matter, from the judgments in any later cases, that every profit made by a Taxpayer in the course of his business activity will be of an income nature. To so express the proposition is to express it too widely, and to eliminate the distinction between an income and a capital profit.

The relevant intention or purpose of the taxpayer (of making a profit or gain) is the taxpayer's intention or purpose discerned from an objective consideration of the facts and circumstances of the case. Generally, in cases where a person's subjective purpose or intention is a relevant issue, the person's evidence as to their subjective purpose or intention can be considered but it must be tested closely, and received with the greatest caution.

Paragraph 13 of TR 92/3 lists some of the factors that may be relevant when considering whether an isolate transaction amounts to a business operation or commercial transaction are the following:

(a)  the nature of the entity undertaking the operation or transaction;

(b)  the nature and scale of other activities undertaken by the taxpayer;

(c)   the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained;

(d)  the nature, scale and complexity of the operation or transaction;

(e)  the manner in which the operation or transaction was entered into or carried out;

(f)    the nature of any connection between the relevant taxpayer and any other party to the operation or transaction;

(g)  if the transaction involves the acquisition and disposal of property, the nature of that property; and

(h)  the timing of the transaction or the various steps in the transaction.

With application to your circumstances, you acquired the vacant land to build a property to generate rental income and did not pursue this in the course of carrying on a business.

Paragraph 16 of TR 92/3 states if a taxpayer not carrying on a business makes a profit, that profit is income if:

(a)  the intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain; and

(b)  the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction.

Capital gain from mere realisation

For Capital Gains Tax (CGT) to apply there needs to be a CGT event that happens to a CGT asset.

A CGT asset is defined in section 108-5 of the ITAA 1997 amongst other things, to include land and buildings.

Division 104 of the ITAA 1997 sets out the CGT events that can happen to a CGT asset and section 104-10 of the ITAA 1997 provides that CGT event A1 occurs on the disposal of an asset.

As a consequence of CGT event A1, subsection 104-10(4) provides that you make a capital gain if the capital proceeds from the disposal are more than the assets cost base or conversely you make a capital loss if the capital proceeds are less than the assets reduced cost base.

The mere realisation of a capital asset will be subject to the CGT provisions.

Where the sale is a 'mere realisation', the sale is on capital account to which the CGT rules will generally apply. These proceeds are not ordinary income.

The expression 'mere realisation' is used to distinguish a mere realisation from a business operation or a commercial transaction carrying out a profit-making scheme.

In Westfield, the company was in the business of designing, constructing, letting and managing shopping centres. The company acquired land in the early 1970s and further land via an option which it subsequently sold and realised at a substantial gain. The Full Federal Court held that the disposal of land was on capital account as the necessary intention or purpose of making a profit on the sale of the land was absent. This was because the main aim of the company was to secure contracts to design, develop and operate/manage a shopping centre on the land. The disposal of the land was incidental to these purposes. The fact that the transaction was commercial or a business transaction was, of itself, insufficient.

The Full Federal Court in reaching its decision considered the judgement in Myer and stated at 4241 that Myer 'emphasises that where a transaction occurs outside the scope of ordinary business activities, it will be necessary to find, not merely that the transaction is "commercial" but also that there was, at the time it was entered into, the intention or purposes of making a relevant profit'.

Section 115-25 of the ITAA 1997 allows a capital gain to be a discount capital gain where the CGT asset was held for a period at least 12 months before the CGT event.

In your case you purchased the property with the original intention of building an investment asset for rental income. You are entitled to apply the 50% capital gains tax (CGT) discount as your purchase and subsequent sale of the land was not in connection with a business that you run, was not an isolated profit making transaction and you held the land for greater than 12 months.

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